Efficient Market Hypothesis

The efficient market hypothesis makes the overall statement that all available information related to the valuation of an asset is fully reflected in the market price. If it were true, investing in undervalued assets would not be possible because the valuation would already be reflected in the market price. This theory is propagated, discussed and debated mainly in academic circles and has little use related to actually allocating assets or selecting securities. The theory can easily be disproved by simply looking at the track records of the handful of investment managers who have consistently outperformed the market over many decades. A shrewd, disciplined, objective and focused investor can find inefficiencies in the market and identify undervalued and overvalued securities.

Nonetheless, the efficient market hypothesis is a popular theory and therefore understanding its basic tenets is important for any investor.